It’s a tale of two economies.
Rising numbers of homeowners and small business owners in the San Fernando Valley are slipping into bankruptcy and foreclosure.
Meanwhile, the Valley’s larger businesses and commercial landlords are actually faring better than those in other parts of L.A.
Much of the two-tiered phenomenon is due to the fact that small businesses and homeowners have had more difficulty recovering from the 1994 Northridge earthquake, and their government aid has been exhausted, while larger businesses have used their greater resources to bounce back.
But on a more profound level, the phenomenon reflects a basic shift in the Valley economy, according to Jack Kyser, chief economist at the Economic Development Corp. of L.A. County.
That shift has been away from the defense and aerospace sectors and towards entertainment and high-tech sectors, he said.
The larger Valley aerospace contractors have been downsizing for years, but many of the smaller subcontractors and job shops reliant on aerospace work have managed to hang on often surviving on unsustainable intermittent jobs and meager attempts to transition to commercial-sector work.
Meanwhile, large entertainment companies have become the economic engines of the Valley, which largely explains the current strength of big business there.
Those large companies will eventually spawn a new crop of ancillary businesses, just as the aerospace industry did in days gone by. But the new crop is just beginning to emerge and its early growth is still being eclipsed, statistically, by the disappearing aerospace-dependent small businesses.
“I think that in the long range, the Valley will be a hotbed for small business, because you have the emergence of the entertainment and high-tech industries that draw on small business,” Kyser said.
But for now, small operators are bearing the brunt of the Valley’s economic restructuring.
“The economic shakeout is still continuing for individuals and small business owners in the Valley,” said David Hagen, a bankruptcy lawyer and partner at the law firm of Merritt & Hagen in Woodland Hills. “The Valley economy had a cold before the earthquake, and the earthquake caused that cold to linger a couple years longer.”
The high level of small business and homeowner failures is reflected in the Valley’s relatively high rate of bankruptcy filings.
About 28 percent of L.A. County Chapter 7 liquidation bankruptcy filings in February were in the Valley, even though the Valley only has 14 percent of the county’s population, according to the Central District of California Bankruptcy Court.
Hagen blamed the Northridge earthquake for the Valley’s disproportionate bankruptcy woes. He said the earthquake produced an initial round of bankruptcies, as businesses and homeowners struggled to make costly repairs to their properties after the quake struck.
Since then, many who survived thanks to infusions of federal and local aid have again run into problems, as government funds stopped flowing over the past year.
“The earthquake money has run through the system, so a lot of people who were hurt in the earthquake and got money (that helped them get by) are starting to hurt again,” he said.
Similar to bankruptcy filings, the proportion of Valley mortgage foreclosures is larger than L.A. County as a whole, based on population.
In January, there were 531 home mortgage foreclosures per 1 million residents in the Valley, compared with 313 foreclosures per 1 million residents in L.A. County as a whole, according to Experian, a real estate research firm.
Some of the foreclosures could be due to the preponderance of condominiums in the Valley and the major damage suffered by many of those units in the Northridge quake, said John Marquis, an executive vice president at TransWorld Bank in Sherman Oaks.
“The earthquake had a major effect on condos because many were underinsured, and the folks didn’t have the financial wherewithal to fix them up. The owners’ associations were deciding what to do, and in many cases, they’ve decided to walk away from their units,” he said.
He added that the foreclosure phenomenon began shortly after the earthquake and continues today.
While the Valley’s small business and homeowner sectors are underperforming the rest of L.A. County, the region’s industrial and office tenants appear to be bouncing back more strongly than their counterparts elsewhere in the county.
The first-quarter vacancy rate for Valley industrial space stood at 6.7 percent, outpacing the 6.9 percent rate for downtown and central L.A., 7.1 percent for the Mid-Cities area and 6.9 percent for the South Bay, according to Grubb & Ellis Co.
Industrial tenants are being attracted to the Valley by reasonable rents, low land prices and a relative abundance of large tracts of industrially zoned land, said Ron Feder, managing principal at Lee & Associates of Sherman Oaks.
In the office sector, the Valley also continues to outpace the rest of L.A. County in the strength of its recovery. The Valley’s overall office vacancy rate of 11.9 percent is the best of any regional submarket in L.A. County, according to Grubb & Ellis.
By comparison, the second strongest market L.A.’s Westside posted a first-quarter vacancy rate of 14.3 percent, while central L.A. posted a rate of 18.4 percent and the South Bay came in at 20.9 percent.